An appraiser is estimating depreciation by the economic age-life method. The improvement has a physical life of 90 years and a total economic life of 55 years. Which figure is the denominator of the age-life ratio?
Correct Answer
B) The 55-year economic life, based on value contribution.
In the expressly economic age-life model, use supported economic life rather than physical endurance. An improvement can physically remain after economic contribution ends. Other component deterioration models may use different supported life conventions; no universal rule makes all physical-life evidence irrelevant.
Why This Is the Correct Answer
Option B is correct because the economic life of an improvement is the period during which it contributes to the total value of the real property. In an expressly economic age-life model, the 55-year supported economic life is the appropriate denominator.
Why the Other Options Are Wrong
Option A: The 90-year physical life, because the building stands longer.
Option A is wrong because using the 90-year physical life on the grounds that the building stands longer measures physical endurance, not value contribution. The stated model is economic, so the 55-year economic life fits.
Option C: An automatic mean of the 90-year and 55-year lives as the denominator.
Option C is wrong because an automatic mean of the 90-year and 55-year lives has no support as a denominator. The economic model calls for the supported 55-year economic life.
Option D: Actual age alone, with no total-life denominator in the ratio.
Option D is wrong because using actual age alone with no total-life denominator abandons the age-life ratio. The method divides effective age by total life, here the 55-year economic life.
Economic model, economic life
Match the denominator to the model: an economic age-life model uses total economic life.
How to use: Use this matching rule when a question gives both physical and economic lives.
Exam Tip
Read which model is named and use the life that matches it; extra figures such as physical life are often included to distract.
Common Mistakes to Avoid
- -Using physical life in an economic age-life model
- -Averaging physical and economic lives without support
- -Omitting the total-life denominator
Concept Deep Dive
Analysis
This question tests which life belongs in the denominator of an economic age-life model. The method is economic, so the denominator is the supported total economic life. Physical life measures how long the structure stands, which can extend beyond its value contribution.
Background Knowledge
In the economic age-life method, depreciation is estimated as effective age divided by total economic life. Economic life reflects how long the improvement contributes to value and is usually shorter than physical life. Some component-based analyses use other supported life conventions, but the stated model governs the choice here.
Real-World Application
An appraiser values a sound 40-year-old office building whose structure could last 90 years, but market evidence shows such buildings stop contributing value at about 55 years. The appraiser uses 55 years as the total economic life in the age-life calculation.
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Previous Question
An equivalent-utility replacement-cost estimate already excludes the excess cost of a specific obsolete feature. What treatment avoids duplication?
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An appraiser is applying the straight-line age-life method to improvements with a current cost new of $360,000, an effective age of 15 years and a total economic life of 50 years. There are no other deductions and no salvage value. What is the age-life depreciation?